Chicago loses court challenge to vacant building registry

Vacant buildings in foreclosure with mortgages backed by Fannie Mae and Freddie Mac do not have to follow Chicago’s vacant building ordinance, a federal judge has ruled.

The decision, filed Friday in Chicago by U.S. District Court Judge Thomas Durkin, deals a blow to the city, which is trying to grapple with thousands of empty buildings caught up in a lengthy foreclosure process and dragging down neighborhoods.

It also has national implications. More than 1,000 municipalities around the country, by one count, have laws that require the registration and maintenance of vacant properties. The court’s decision could prompt the FHFA to file suit against other cities’ local laws, or municipalities themselves may have to retool their own ordinances if they decide they are no more enforceable than Chicago’s.

The local law, which took effect in November 2011, requires not just owners of vacant buildings but also mortgagees -- the holder of the mortgage but not necessarily the owner of the mortgage -- to promptly register a building after it becomes vacant, pay a $500 registration fee and maintain certain property standards. Violators of the ordinance incur fees of $500 to $1,000 for each infraction.

Less than a month after the ordinance took effect, the Federal Housing Finance Agency, the overseer of Fannie Mae and Freddie Mac, filed the federal lawsuit against the city, claiming properties they backed in foreclosure were exempt from the ordinance. The FHFA has argued, among other things, that Chicago could not make law for the federal agencies and that the registration fees amounted to a tax on the federal government.

In oral arguments in June, Howard Cayne, an attorney representing the FHFA, said the law amounted to "an incredible power grab" by the city. Fannie Mae and Freddie Mac have their own property maintenance standards that are not as demanding as the city’s ordinance.

During that June hearing, Durkin said he was sympathetic to the city's efforts to get a handle on its vacant building issues because of the "rampant crime problems."

In his ruling siding with most of the FHFA's arguments, Durkin reminded the agency of its responsibilities, and the city of its limitations.

"This is not to say that FHFA can let properties where it is the mortgagee become decrepit," Durkin wrote in his opinion. "Fannie and Freddie's own guidelines, not unlike the city's, require it to maintain the properties in a manner to preserve their value. This is consistent with their overall mandate to preserve the assets of Fannie and Freddie -- a field into which the city of Chicago may not encroach."

The city could appeal the ruling, and ask a judge to stay the order pending an appeal, which would force Fannie and Freddie to continue following the ordinance. For its part, the FHFA could seek reimbursement for the unspecified sum of registration fees paid to date.

As of late May, about 2,900 building owners and 2,100 mortgagees had registered vacant buildings with the city. Between June 1, 2012 and May 21, the city collected $2.8 million in registration fees.

When it filed the case in November 2011, the FHFA said it owned about 258,000 mortgages in Chicago.